About the client

Our client is a multinational technology conglomerate with operations encompassing automation and digitalization in the process and manufacturing industries, intelligent infrastructure for buildings and distributed energy systems, rail transport solutions, and health technology and digital healthcare services. Headquartered in Germany, our client and its subsidiaries employ approximately 311,000 people worldwide with operations in over 190 countries. 

Business challenge

Our client is a multinational company with operations in various industries, including healthcare, manufacturing, infrastructure, and mobility. As part of their business, they import and export goods and services in foreign currencies, which exposes them to foreign exchange (FX) risk. They also raise capital in the form of debt and intercompany loans, and invest in money market instruments, which exposes them to interest rate (IR) risk. Additionally, they purchase commodities as raw materials, which exposes them to commodity risk. The treasury team’s objective is to hedge their portfolio against these risks in line with their internal hedging policies. They do this by purchasing derivatives, such as forwards, options, futures, and swaps. They also transfer the hedging costs or gains to the respective divisions and business units. The treasury team must carefully plan their hedging activities to take into account all of their FX, IR, and commodity exposures, as well as any planned or unplanned changes to these exposures. They must also adhere to all applicable regulatory and accounting guidelines. The treasury team also needs to track the entire life cycle of each trade, from trade booking and confirmation to settlement, cancellation, or rollover.

Currently, our client uses a SAP system to manage their currency inflows and outflows. However, they did not have a hedging solution integrated with their SAP system. This made it difficult for them to effectively manage their FX, IR, and commodity risks.

Key risks in the current hedging process

• Time-consuming: Manually tracking forward contracts and hedges can take up a significant amount of time. This is because our client had to extract data from multiple systems and manually calculate the values of its contracts and hedges.
• Error-prone: Manual tracking is also error-prone. This is because it is easy to make mistakes when entering data or calculating values. These errors can have a significant financial impact and lead to losses for the company
• Inefficient: Manual tracking does not allow the team to be efficient as the time spent by highly qualified finance teams in this manual process could be spent focusing on other tasks.

These risks were especially large for our client, as they have a large number of contracts and hedges that are spread across multiple countries making it more difficult for them to manage their risk exposure.

Our solution

We developed an integrated corporate treasury system which is capable of facturing in imports. The Treasury team hence gets a centralized view of all imports and exports. They can book, maintain and manage settlement of forward contracts within one system. It offers straight – through processing of the principal tasks in a treasury department to ensure optimum liquidity management in strict accordance with accounting regulations. The software thus facilitates decisions regarding future investments and borrowing, based on current liquidity analyses and positions.

Our system helped them perform the below tasks with great efficiency –

• Booking of planned, firm commitment and invoiced foreign currency transactions
• Benchmarking of these transactions against market forwards/budget rates
• Booking of currency forwards, options, swaps and other structured derivatives
• Support full/partial cancellation, roll-over of derivative contracts
• Calculate prices, MtM and generate the accounting entries
• Support linking of exposures to derivative contracts for the purpose of derivative accounting
• Support utilization of derivatives against underlying exposures or cash settlement
• Generate periodic position reports in the client’s formats which reflect the performance metrics of the treasury
• Maker-checker authorizations (the 4 eye principle) in accordance with internal policies

Our system’s Hedging module was equipped with the below features to help our client make informed hedging decisions –

1. Exposure details captured: The system captures all relevant exposure details, such as the currency, amount, and maturity date. This information is used to track the company’s risk exposure.
2. Treasury team can book the forward contracts: The system allows the treasury team to book forward contracts on a single system, making the process simple and seamless.
3. System can track hedged and unhedged positions in all time buckets: This information is used to track the company’s risk exposure both from a short term as well as long term perspective.
4. System can also check for hedge effectiveness: This is done by comparing the actual and expected values of the hedged positions.
5. System maintains all hedging costs: The system also generates reports that show the actual payment schedule and cash flow projections for the hedged positions.

Through this solution, our client was able to achieve efficiency in the below areas of Corporate Treasury and Hedging – 

1. Comprehensive hedge accounting – Our system supports hedge accounting across various asset classes, including foreign exchange (FX), interest rates, and commodities in accordance with universally accepted standards such as FAS 133 and IAS 39. This ensures compliance with regulatory requirements while optimizing risk management strategies. The system’s advanced capabilities streamline complex accounting processes, providing accurate and real-time insights into hedge effectiveness, documentation, and reporting.
2. Centralized view – The system provides a centralized view of all import and export activities to the treasury teams. This comprehensive perspective enables them to monitor and manage their hedging positions with unparalleled precision. Real-time data integration and visualization allow teams to swiftly assess the current status of their hedging activities across various asset classes.

Outcomes

We started by deploying our system in our client’s India division 11 years ago. Today, their 7 country divisions and 10 entities use our corporate treasury system. A single deployment helps them today manage an unimaginable volume of transactions across geographies, currencies and divisions.

Here are some of the other benefits that our client derived through our corporate treasury and hedging system 

• Attribution of hedging costs to different business units: This allows them to track the costs of hedging.
• Centralized view of all imports and exports: This allows the company to track its foreign exchange exposure.
• Automated reporting: This helps them in tracking the company’s risk exposure, hedging costs, and cash flow projections. 
• Hedge documentation: This is required for regulatory compliance and for risk management purposes.
• Cash flow projection: This allows them to plan for future cash flow needs 
• Hedge accounting: This complex process is prone to errors when done manually. Our automated system helps in improving accuracy and efficiency.
• Email triggers for approvals: This makes the workflow easier and time-efficient.